Back in July 2024, the Education Department announced it would stop accepting new applications for the PAYE plan and limit enrollments for the ICR, but they’re now back in play until July 1, 2027. Both plans, like other income-driven repayment options, adjust your student loan payments based on your income and family size, and they extend the repayment period from the typical 10 years to 20 or 25 years. At the end of this period, any leftover debt is wiped clean.
This decision to reopen the plans comes as a reaction to legal obstacles that have hindered the introduction of the latest income-driven repayment plan, known as SAVE. This issue has left 8 million borrowers in limbo, pausing their payments indefinitely. During this time, interest isn’t accruing, and payments aren’t required, but borrowers aren’t making progress toward forgiveness.
If you’re currently on the SAVE plan, and you choose to switch to PAYE or ICR, you could start earning credit towards forgiveness again. However, keep in mind that your payments could increase compared to what you owe with SAVE. So, how do you decide if a switch is right for you?
If you’re working toward either Public Service Loan Forgiveness (PSLF) or forgiveness under an IDR plan, you might want to look at PAYE. Right now, those on the SAVE plan are stalled in their race to hit the 120-payment mark needed for PSLF, which impacts teachers, government workers, and many in the nonprofit sector. Switching to PAYE could get them back on track. According to Jill Desjean, a senior policy analyst with the National Association of Student Financial Aid Administrators, it’s crucial for borrowers at the start of their PSLF journey not to delay this switch. As she notes, “Waiting too long can mean higher payments down the line because of increased earnings, which translates to less forgiveness.”
Even those close to reaching the PSLF threshold face decisions. Daniel Collier, an assistant professor at the University of Memphis specializing in student debt and income-driven repayment, advises that those nearing the finish line might do well to move from SAVE to PAYE in order to complete their remaining few payments efficiently.
And if you’re aiming for IDR forgiveness, it’s worth considering a switch, especially if you’re closing in on the forgiveness mark. IDR forgiveness is available to all federal loan borrowers regardless of their job, and PAYE offers it after 20 years, compared to 25 with ICR.
There are other scenarios where PAYE might be a suitable match. Perhaps you were on PAYE before transitioning to SAVE and prefer its structure, or you have graduate school loans, which PAYE can forgive after 20 years instead of 25 under SAVE. If you anticipate a substantial jump in income, note that PAYE keeps payments capped at 10% of discretionary income, ensuring they won’t exceed the standard plan’s amount, unlike most other IDR plans. Eligibility for PAYE requires you have had no existing FFEL or Direct Loans as of October 1, 2007, and that you took out a Direct Loan post-October 1, 2011, with a partial financial hardship.
Meanwhile, PAYE generally offers better terms than ICR, which requires 20% of income and 25 years for forgiveness. However, ICR remains the only option for those with parent PLUS loans.
There are good reasons to hang on to SAVE if loan forgiveness isn’t your goal. This interest-free pause lets you funnel cash into other financial aims or tackle high-interest debts like credit cards. “Some borrowers might say, ‘I’m saving on my loans now, so I’ll direct funds towards retirement, my child’s education, or other debts’,” Desjean explains. Alternatively, you could use this period to make headway on your student debt, as payments without interest directly reduce the principal, ultimately lowering the total repayment amount.
Yet, switching from SAVE isn’t without its uncertainties. Challenges in court to SAVE’s validity might change its future, the potential re-emergence of the REPAYE plan, and how the current administration handles existing forgiveness programs, including PSLF, all play a role.
Before making a decision, thoroughly assess your student loans and financial circumstances to find the approach that best suits you. You’ve got time until July 2027 to consider PAYE and ICR under the present guidelines. “It’s crucial to be well-informed on how a switch might affect your finances before deciding,” advises Collier.
To help clarify your options, try the Education Department’s loan simulator, which links to your studentaid.gov account, providing insights on monthly payments, repayment costs, and potential forgiveness timelines across various repayment plans. Keep in mind any shift could influence your monthly payment size, depending on your income. For further assistance, contact your federal student loan servicer or even reach out to your college’s financial aid office.
“Past students often came back to me with questions like, ‘What repayment plan should I choose?’,” Desjean recalls from her time working in aid offices. “Financial aid administrators have a wealth of knowledge about this and can tailor advice to your particular situation, often more effectively than the loan servicers.”
